AKD Quotidian about —: PSMC: Reinitiating Coverage

Karachi: AKD Securities reinitiates coverage on Pak Suzuki Motor Company (PSMC) with a target price of PkR8O/share and a Buy rating.

According to AKD Securities, while lower interest rates may not revive auto financing just yet, AKD Securities believes PSMC is poised to deliver bumper earnings growth across CYIIF/CYI2F courtesy its agreement to supply 20k cars (Mehran+Bolan) to the Punjab Government. Specifically, AKD Securities sees NPAT growth of 80%YoY in CYIIF and 84%YoY in CYI2F, which should drive stock price performance. In terms of a stronger JPY, note that AKD’s financial model incorporates very conservative Gross Margin assumptions of 2%-3% across the next 5yrs even as 1) PSMC maintains relatively higher localization levels and 2) has a “stable” product suite owing to its lower priced variants. In addition, while talk of lower import duties poses a key risk to the industry, channel checks lead us to believe that is unlikely to materialize and that status quo should prevail. PSMC trades at a CVI2F PER of 7.8x (vs. last 6 yrs avg. of 15.6x) where AKD’s target price of PkR8O/share offers upside of 21%. Buy!

Government of Punjab’s taxi scheme: PSMC has signed an agreement with Bank of Punjab (BOP) for the launch of Government of Punjabs’ Self Employment Scheme for Educated Unemployed Youth’. According to this scheme, PSMC will supply 20k units of Suzuki Mehran and Bolan over a period of eight months starting Sep11. AKD Securities understands that 8k units will be supplied in CY11 while the balance will be sold in CY1 2. This agreement should be main factor contributing to a surge in topline-driven growth in profitability where AKD Securities projects NPAT growth of 80%Y0Y in CY11 F and 84%YoY in CY12F.

PSMC-better placed against headwinds: Positives for the auto industry were announced in the FY12 Budget (removal of Special Excise Duty and 1ppt decrease in GST to 16%), allowing lower retail unit prices. However, rising input prices (JPY has gained 7%FYTD vs. the PkR) have recently compelled a round of price increases (by 2%). In this regard, the auto industry faces headwinds from 1) potential lower import duties and 2) a stronger JPY. Channel checks indicate the former is unlikely to materialize given severe repercussions for domestic manufacturers while PSMC appears relatively better placed to withstand pressure from JPY appreciation (PSMC has higher localization levels >60% – and has a lower priced, more stable, product suite). While AKD Securities incorporates conservative GMs of 2%-3% across the next 5yrs, upside risk presents itself if the Japanese government intervenes in the currency market and/or steel prices trend lower.

Investment Perspective: AKD Securities believes the domestic auto industry is likely to remain entrenched in a low Gross Margin environment over the near to medium term. Winners in this regard should be players with potential for volumetric growth. AKD Securities likes PSMC over peers due to its locked-in sales over the next two years (Government of Punjab scheme) whereby a strong topline should drive exceptional profit growth over the next two years. While AKD Securities doesn’t expect lower interest rates to revive auto financing just yet, AKD Securities notes that PSMC outperformed the broader Index by 34% in the last interest rate down-cycle (Apr09-Nov09 when DR came off from 15% to 125%).